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George Osborne heralds year-long review into the sector as a ‘decisive moment’ to force through major changes Britain’s banks face the most radical overhaul in decades after George Osborne heralded a year-long review into the sector as a “decisive moment” to force through the first major changes to the structure of the industry since the 2008 financial crisis. Even so the reforms will take longer than expected – until 2019 – to implement and are not as draconian as some campaigners had hoped. But as he endorsed the recommendations of the independent commission on banking, chaired by Sir John Vickers, the chancellor pledged to create a “new banking system that works for Britain” after more than £65bn of taxpayer funds were used to bail out Royal Bank of Scotland and Lloyds Banking Group during the financial crisis. Vickers, heralding his 358-page report as “far-reaching”, urged the government not to water down his package of recommendations or “pick and mix” as the coalition sets out how it will respond to the proposals by the end of the year. Chief among Vickers’ proposals is a plan to ringfence the retail arms of banks from their investment businesses in order to protect high street customers should another financial crisis occur. Campaigners had hoped that both sides of the banking business would have to be completely separated as individual companies. Under the Vickers plan, banks would also have to set aside more cash than is currently required to cushion the blow of any future crisis. The figure suggested by Vickers – 10% of risk-weighted assets – is higher than internationally-agreed 7%, but Vickers said that the “opportunity must be seized” to establish a banking system that gets taxpayers “off the hook”. He also hit out at bankers’ pay. “We’ve seen large pay packages at a time when taxpayers are on the hook for the banks,” Vickers said. “If retail deposits were not used for investment banking it would go a long way in dealing with the issue.” The proposed reforms – unveiled just days before the fourth anniversary of the run on Northern Rock and the third anniversary of the collapse of Lehman Brothers – were announced amid further turmoil in the eurozone and fears of another crisis for major continental European banks. European stocks tumbled to two year lows, while the FTSE 100 ended 85 points at 5,129 on a volatile day of trading dominated by concern about Greece defaulting on its debt and Italy being dragged in the crisis. French banks were down sharply. Shares in Britain’s major banks gyrated and at times bucked the downward trend on relief that the Vickers’ proposals had not been tougher. But they ended lower, with the fall in the price of bailed-out RBS – regarded as one of the biggest losers from the Vickers reforms – and Lloyds taking the loss on the taxpayer stakes in the two banks to £38bn. Banking experts believe the taxpayer’s stake in RBS may now be more long-term than was expected at the time of the original bailout, because the Vickers recommendations will force chief executive Stephen Hester rewrite the loss-making bank’s strategy for recovery. Despite the scale of the investment by the taxpayer in the two banks, Osborne told MPs that “we should not confuse the interest of banks’ shareholders with those of the British taxpayer”. Criticising Labour’s record on banks, the chancellor said: “The question of how Britain is the home of successful global banks that lend to British families and businesses, but don’t have to be bailed out by the British taxpayer, should have been answered a decade ago. But it was not even asked.” He added: “Today represents a decisive moment when we take a step towards a new banking system that works for Britain.” The reform will require legislative change which is causing tension in the coalition. Senior Lib Dems want it bolted on quickly to an existing financial services bill, while the chancellor appeared to favour a separate bill. “I think it is likely, I do not want to say absolutely in this case, that we will need a separate piece of legislation specifically on some of these changes to banking but I hope that we can also use the financial services bill to also implement other key parts of this reform.” Ed Balls, the shadow chancellor, called for more humility from Osborne, who had attacked him for “burdensome” regulation when Labour was in government, as he apologised for the banking crisis. “As I have said before, for the part that I and the last government played in that global regulatory failure I am deeply sorry,” said Balls, who also wants legislation pushed through in the financial services bill. A new consultation on bank reform is now expected as Osborne said “detailed work” would start immediately on reforms that Vickers estimated would cost between £4bn and £7bn annually. Legislation will be passed in this parliament. Amid criticism that the reforms were not as radical as might have been hoped for and taking longer than expected to implement, the ICB conceded that its reforms were “deliberately composed of moderate elements” but insisted “the reform package is far-reaching”. It said: “Together with other reforms in train, it would put the UK banking system of 2019 on an altogether different basis from that of 2007. In many respects, however, it would be restorative of what went before in the recent past – better-capitalised, less leveraged banking more focused on the needs of savers and borrowers in the domestic economy.” Up to £2tn of assets could end up inside the ‘firewall’ – including all domestic high street banking services – as the ICB said that the aggregate balance sheets of the UK’s banks was over £6tn and that between one-sixth and one-third of these should be protected from investment banking operations. But there was caution among industry leaders about the reforms amid warnings that lending to businesses could dry up if banks are forced to hold more capital and reconfigure their businesses. CBI deputy director-general Neil Bentley said: “The UK is going it alone on ring-fencing, so the government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth.” Banking reform Banking Financial sector George Osborne Ed Balls Jill Treanor guardian.co.uk